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NAB

Major Bank Investment Grade FRN

The trading desk has uncovered a rare block of the NAB BBSW +4.0% OTC FRN. At 2.92% YTC, this is the highest-yielding AUD investment grade (IG) FRN in the market. BondAdviser research is attached, key investment considerations and analysis from Matthew Macreadie (BondIncome Credit Strategist) below.

Investment Considerations

  • Highest yielding IG AUD FRN in the market;
  • Highest coupon margin for any IG FRN in the AUD market (BBSW + 4%), delivering a running yield (income measure) of 3.8%;
  • Relatively high coupon margin/yield lowers the risk of a “non-call” event in July 2025 and positions the FRN for outperformance in a rising rate environment;
  • Superior relative value when compared to the equivalent ASX-listed hybrids (refer to Chart 3 below);
  • The FRN is yielding 0.23% higher than the longer (call) dated ASX-listed NABPF (June 2026);
  • Investment-grade status drives institutional participation, supporting secondary market liquidity;
  • NAB surplus CET1 capital sits around AUD8-10bn at the end of March 2021, above the 10.5% “unquestionably strong” benchmark level; and
  • An appropriate addition to any portfolio looking to reduce duration risk and maintain income.

Chart 1. NAB Wholesale Capital Notes II key characteristics

Product Type Capital Note
Yield to Call 2.92%
Deal Size $600m
Running Yield 3.8%
Current Coupon 4.03%
Franking Credits Yes
Capital Price $105.90
Call Date Jul-25

Source: BondIncome

NAB Wholesale Capital Notes II: Credit Strategy

Our expectations of supply pressures regarding total loss absorbing capital (TLAC) exposure have abated in the near-term. We expect this to help Additional Tier 1 (AT1) bond performance where the overall yield remains quite attractive versus T2 equivalents.

For background, the Australian Prudential Regulation Authority (APRA) recently capped the TLAC buffer at 3%, with a deadline in 2024. APRA could have increased the TLAC buffer up to 5% with an early deadline but decided to sit tight. The TLAC buffer will be filled with Tier 2 (T2) not AT1.

On T2, we expect the banks to be net issuers of T2 as the TLAC deadline looms in 2024, with near-term T2 issuance to become more biased towards refinancing only. Our takeaway from this is that we may not see a lot of T2 supply for the rest of calendar year 2021.

Relative Value

The National Australia Bank (NAB) wholesale capital notes II look quite attractive versus the (over the counter) OTC AT1s opportunity set. With TLAC net supply likely to be predominantly more back-ended than front-loaded, this should help AT1 bond performance where the overall yield remains quite attractive versus T2 equivalents. Whilst one can never be 100% certain when it comes to call risk, we do think the risk remains low for a missed call on an AT1 security.

National Australia Bank (NAB)

NAB, like the other major banks, maintains a strong capital position. APRA’s focus for the banks remains core equity capital, with the expectation that the major banks are compliant with its benchmark of “unquestionably strong” minimum Common Equity Tier 1 (CET1) ratio of 10.5% of risk-weighted assets (RWAs) in 2023.

NAB’s CET1 ratio currently sits at 12.37% as of 31 March 2021. Proforma CET1 is 12.75% after the announced wealth business divestment and Neobank 86 400 Limited acquisition. With CET1 ratios in the 12% range, surplus CET1 capital sits around AUD8-10bn at the end of March 2021, above the 10.5% “unquestionably strong” benchmark level.

Chart 2. NAB Capital Ratios

Source: BondAdviser as of Financial Year ending 30 September

Chart 3. Relative Value for ASX Listed AT1s versus OTC AT1s

Source: BondAdviser as at 28 July 2021

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